May 20, 2013

Another Tax Exempt Twist

By now, everyone should know about the IRS and the tax
exempt status “scandal”. For those hiding in the attic the last few weeks, the
IRS used key words like: tea party” and “patriot” to give some applications for
501(c)(4) status extra attention.

A 501(c)(4) organization is an organization which is set up to
promote social welfare or a local association of employees which has a
charitable, educational or recreational purpose. They have become very popular
in recent years as a way for an organization to do some limited political
activity without having to publish their donors. This is different from a
Section 527 political organization. A section 527 group also has tax exempt
status but tighter information reporting requirements.

The Treasury Inspector General for Tax Administration TIGTA)
has issued their report on the subject and found that the IRS did select some
501(c)(4) applications for more
attention. This action was not politically motivated but based on lack of clear
vetting criteria to screen applications for organizations which will be too political.

As with any political scandal there has been much finger pointing,
calls for resignations and Congressional hearings. In Friday’s hearing (May17,
2013), Rep. Lloyd Doggett (D-TX) introduced a new twist when he asked TIGTA’s
J. Russell George if the scandal would have been avoided if the IRS had
followed the actual Internal Revenue Code wording for a 501(c)(4) organization.
It turns out that the IRC specifically states that to qualify for tax exempt
status under section501(c)(4) an organization must be operated exclusively for
social welfare. The regulations the IRS wrote to carry out that section,
however, say that the organization only needs to operate primarily for social
welfare. Primarily isn’t exclusive.

This isn’t a new argument. Citizens for Responsible Ethics
in Washington (CREW) filed a brief on Friday in the Gill v. Department of the
Treasury court case. (The IRS had filed to have the case dismissed.) Dr. David
Gill is challenging the IRS about their 50 year old regulation defining 501(c)(4)
as primarily for social welfare and not following the IRC’s exclusive definition. While a candidate for
Congress, he alleges that he was targeted by a 501(c)(4) organization which
would not meet the exclusive test.

In an already bad year for the IRS, they are now in the
spotlight for handling a sensitive subject badly and that they might have been
doing it wrong for 50 years.

Disclaimer

Disclaimer

A reader should seek advice from an independent tax adviser with respect to the information on this blog based on the reader’s particular circumstances. This advice is intended to be general information and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed here.